6-Plex Home Run Deal

[Shiloh Lundahl]

This year we increased our net worth by 355k from one deal! Here’s the story.

On January 17, at 10:30 in the morning I got an email from a wholesaler advertising a 6-plex in Florence, Arizona, for 320k.  I usually buy single family homes and sell them on lease options because it cuts down on the costs of managing the property but I was interested in this deal because it was less than a half a mile from a mobile home park we were in the middle of purchasing. So I figured, since we would be managing a mobile home park which takes more time than managing a single family rental porfolio, we would just lump the work of managing this 6-plex into the overall costs of managing the park as well and we would benefit from the economies of scale.

Anyway, I did some quick math and divided the 320k by 6 and came up with 53,333 per door. They were each renting out for $550 and there was 1 vacant. There were some pictures of a few of the units and they looked to be in decent shape. I thought that the rental rate was low for the area so I looked up on Zillow what the rents were going for for a 2 bed, 1 bath unit. There was practically nothing renting for less than $800. So within 5 minutes I called up the wholesaler and I asked him more info on the property and I offered 300k for the deal. The wholesaler said “no.” So I told him I would call my partner and get back to him. I called up my partner and forwarded the email and talked about numbers with him. We did some quick calculations to see what the property would cash flow for if we could raise rents up to $650 a month. 

We came up with our “all in” Being about 355k after putting about 15-20k into repairs and after hard money costs and closing costs. If we could get a loan on the property of 75% of 350k which would be $262,500 and we could get a private money loan for an additional 90k paying at 10% Then we could cash flow about $700 a month with little of our own money into the deal. But truthfully I thought we could get it to appraise for more which would create some more equity and would lower the leverage percentage. So we called the wholesaler and told him that we were interested. He sent us the contract, I signed it on my phone and went to the bank to get a cashiers check for 5k and dropped it off at the title company and we were under contract.

I called up my assistant and asked her to go take a look at the property because it was about 45 minutes from where I live and work. She went down and knocked on the doors of the property and told the tenants that she worked for the company who would be purchasing the property and wanted to see if she might be able to take a look at the condition of their units. Surprisingly, they were willing to let her take a look at them. She found out that one unit had been gutted in the kitchen and the bathroom and another unit had some water damage where the flooring would need to be replaced. So I called the wholesaler back and said that the pictures he sent didn’t show anything about one of the units being gutted and another one having been flooded. He said that he had gotten more interest in the property and if I didn’t want it then he would just sell it to someone else (he is a young wholesaler, inexperienced with how to speak with an investor who potentially could buy multiple properties from him over the next few years. So I took it upon myself to educate him of those facts. He didn’t seem to appreciate my words of wisdom). The wholesaler did not take accountability or apologize for not including any information about the disarray of the 2 units. So I figured it would be a shame to let this property go and that there was still potential for profit so I did what an experienced invest I would do. I called up the title company to find out who the seller was. They gave me his name. My partner and I then got in contact with the seller to find out if he had made an insurance claim on the property for the water damage in the 2 units. He said that he had and he agreed to pass that insurance money of about 5k to us through escrow.  the wholesaler then caught wind that we were speaking directly to the seller and he called me up to tell me to talk directly with him about the deal and that he would talk to the seller for me but that I shouldn’t talk directly to the seller. I informed the wholesaler that I would not be cutting him out of his commission but that he was not being very helpful about the condition of the property or the repairs so I was just handling that directly with the seller. He didn’t like that, but he wasn’t very helpful so I didn’t really care. We closed on the property for 320k with the 5k credit back in repairs and the wholesaler collected his full fee.

During the escrow period another tenant left and the day of closing one more tenant left as well. So we were down to only 3 tenants paying $550 a month. For financing we got a hard money loan for 288k at 12% with no points and a $700 doc fee. The private money loan Was for 30k at 10%. We were planning on putting about 30k of our own money into fixing up the properties and painting them. 

Before.

After

We painted the inside and outside of the empty units and put new vinyl plank flooring inside after we fixed the plumbing issues. We also painted the kitchen cabinets. The total cost of the rehabs ended up being about  40k. And one more tenant left during the renovation period so we turned that unit over as well.

Instead of increasing the rents to 650k which was our plan since we didn’t want to gouge the tenants, we advertised the units for $799 per month for new tenants. We were able to fill up the units relatively quickly since there was a shortage of available housing. We also signed new lease agreements with the 2 remaining tenants for $799 but that new agreement included an addendum increasing their rents From $550 to $799 over the next 2 years (again because we didn’t want to gouge the older tenants but we also wanted to reflect what the actual rents for that property would be for the appraiser and the bank).

We provided all of the information to the bank and the appraiser. So now monthly rents for the 6-plex show $4794 plus an additional $70 for some storage shed rentals on the property. As far as expenses, the tenant pays for all utilities including water, electrical, trash, and sewer. The units all had new AC units before we purchased them and the roofs had recently been reroofed. Our taxes and insurance for the property were each $2000 a year so the total monthly expenses would be $333 a month. There were no management fees included in the expenses since I am technically the property manager but in reality, I manage the property through my assistant.

So with such low monthly expenses and such high rental income and with compressed cap rates, I was hoping that the appraisal would come in at 550k, but instead, the appraiser came in with a value of 725k! AWESOME! Our “all in” was about 370k include purchase, rehab, money costs, and holding costs. Our bank is processing the a loan for 500k for the property. This means that we will be able to pay off the hard money and private money loans, get reimbursed for the rehab, and get an additional 130k in cash out, and we will be able to keep the property and cash flow about $1800 a month (minus savings for cap-ex which we shouldn’t Have to worry about for awhile).

So ultimately this one deal created about 355k in increase in net worth plus it gives us $1800 a month in monthly cash flow. This has been one of our better deals so far this year. 

I am open for questions or feedback.